Why hermeneutics are usedLanguage, especially figurative language, is often obscure and vague and thus needs to be interpreted. In the study of religious writings, it is often found that they are written in a certain vernacular and for a specific audience. In order to truly understand said writings, it is important to put them in their proper cultural and historical context.

The German philosopher Martin Heidegger was interested in reading philosophy in the original Greek, and noticed that translators often added their own interpretations as they translated. Again, in order to truly understand those texts, it is necessary to remove any bias by the translator.

It should be noted that hermeneutics cannot be used to rectify objective falsehoods, nor can it be used to verify the authenticity of a writing. Hermeneutics does not attempt to determine what is true or false, but only what the writer intended to say. This being said, a conclusion made with the use of hermeneutics is still open for revision and is never really complete (see hermeneutic circle below).

Application
This is where a text proves its value when applied to contemporary life. The application of hermeneutics allows, for example, a judge to apply the law to a case or a priest to write a sermon based on scripture. With their application, the judge and priest are creating a new interpretation, thereby changing the very principles they have applied. Future applications of the law or scripture may even use past applications as precedent (this is especially common in the practice of law).

The Hermeneutic Circle
This use of precedent in the application of hermeneutics represents what is called the hermeneutic circle, where our beliefs about a certain text are subjected to critical testing. It is actually similar to the way in which science is practiced. Scientists start by identifying a problem, and they theorize the answer to that problem. In performing and observing their experiment to test the problem, they gain new insights which must then be used to revise their hypothesis. This is basically a hermeneutic circle.

Another example: When reading a book, we are influenced by our overall view of the book's themes. But how are we to know the book's themes as a whole if we have not yet finished reading the parts of the book? We need to start reading the book with our own "pre-understanding", from which we hypothesize a main theme for the whole book. After we finish reading the book, we go back to each individual chapter with this main theme in mind to get a better understanding of how all the parts relate to the whole. During this process, we often end up changing our main theme. With the new information gained from this revision, we can again revise our main theme of the book, and so on, until we can see a coherent and consistent picture of the whole book. What we get out of this hermeneutic circle is not absolute and final, but it is considered to be reasonable because it has withstood the process of critical testing.

Hermeneutics of Suspicion and Affirmation
The French philosopher Paul Ricoeur found that he was uncomfortable with the subjective nature of hermeneutics. Each application of hermeneutics contains the bias of the person doing the application. Ricoeur points out three "master's of suspicion": Marx, Nietzche, and Freud. He recognized that their "hermeneutics of suspicion" presented an incomplete picture or religion. His response was to perform a "hermeneutics of affirmation" in order to achieve a sort of Hegelian equilibrium in which a synthesis transcends a critical or affirmative ideology and becomes a neutral one.
Sources:
http://szabo.best.vwh.net/hermeneutics.html
http://www.newadvent.org/cathen/07271a.htm
http://capo.org/premise/95/sep/p950812.html
http://www.vlsi.uwaterloo.ca/~khkwok/postmodernism/node60.html
http://www.geocities.com/philodept/diwatao/neutral_conception_of_ideology.htm

This is not meant to be an exhaustive discussion of hermeneutics; Though I am familiar with all the ideas discussed above, I am not an expert on the subject, and, as such, welcome any criticism or suggestions anyone might have.